Did the Treasury Secretary lie to us?

By Kurt Brouwer

I hate to actually ask this question, but I think it is necessary. Secretary Timothy Geither recently wrote (with co-authors) reports on the status of Social Security and Medicare. In each report, he wrote a statement that was, at best, misleading. At worst, the statements were outright lies. You be the judge.

Here is what he and the other co-authors wrote about Medicare in the opening section of the Social Security report [emphasis added]:

…Each year the Trustees of the Social Security and Medicare trust funds report on the current and projected financial status of the two programs. This message summarizes our 2010 Annual Reports.The outlook for Medicare has improved substantially because of program changes made in the Patient Protection and Affordable Care Act as amended by the Health Care and Education Reconciliation Act of 2010 (the “Affordable Care Act” or ACA). Despite lower near-term revenues resulting from the economic recession, the Hospital Insurance (HI) Trust Fund is now expected to remain solvent until 2029, 12 years longer than was projected last year, and the 75-year HI financial shortfall has been reduced to 0.66 percent of taxable payroll from 3.88 percent in last year’s report. Nearly all of this improvement in HI finances is due to the ACA. The ACA is also expected to substantially reduce costs for the Medicare Supplementary Medical Insurance (SMI) program; projected program costs as a share of GDP over the next 75 years are down 23 percent relative to the costs projected for the 2009 report…

Treasury Secretary Geithner went on to point to a few issues with health care legislation and its impact on Medicare, but he forgot to mention one critical fact: Medicare’s chief actuary put out a statement that is sharply at odds with what Geithner wrote. And Geithner certainly knew this because the chief actuary’s report was part of the Medicare report Geithner wrote.

Take a look at this statement issued by Medicare’s chief actuary, Richard S. Foster,Chief Actuary, Centers for Medicare & Medicaid Services. This is from the full report on Medicare cited below, also co-authored by Secretary Geithner [emphasis added]:

…For these reasons, the financial projections shown in this report for Medicare do not represent a reasonable expectation for actual program operations in either the short range (as a result of the unsustainable reductions in physician payment rates) or the long range (because of the strong likelihood that the statutory reductions in price updates for most categories of Medicare provider services will not be viable). I encourage readers to review the “illustrative alternative” projections that are based on more sustainable assumptions for physician and other Medicare price updates. These projections are available [here]…

In the 2010 Annual Report of the Board of Trustees of the Federal Hospital Insurance and Federal Supplementary Medical Insurance Trust Funds, the Board warns that “the actual future costs for Medicare are likely to exceed those shown by the current-law projections.” The Trustees Report is necessarily based on current law; as a result of questions regarding the operations of certain Medicare provisions, however, the projections shown in the report do not represent the “best estimate” of actual future Medicare expenditures. The purpose of this memorandum is to present an alternative scenario to help illustrate and quantify the potential magnitude of the cost understatement under current law…

Medicare’s chief actuary states that the actual future costs for Medicare are likely to exceed projections cited by Geithner. The actuary sets forth alternative projections that raise substantive issues about savings from health care reform.

Geithner certainly knew the chief actuary had substantive concerns about the optimistic projections. Perhaps Geithner thought we would miss that section or perhaps he hoped his positive spin would be picked up by the media and that would be enough. In any case, Geithner’s statements on Medicare are shocking and this should be big news.

In one sense, this misleading report was somewhat successful in that Paul Krugman blithely reported Geithner’s statements as being good news. So, the lie was halfway around the world before the truth got going. Here is the good professor’s post on this [emphasis added]:

…In other words, the Medicare actuaries believe that the cost-saving provisions in the Obama health reform will make a huge difference to the long-run budget outlook. Yes, it’s just a projection, and debatable like all projections. And it’s still not enough. But anyone who both claims to be worried about the long-run deficit and was opposed to health reform has some explaining to do. All the facts we have suggest that health reform was the biggest move toward fiscal responsibility in a long, long time…

Krugman is citing Medicare’s actuaries, but not actually reporting what the chief actuary wrote. And, the ‘all the facts’ line is wonderfully misleading. All the facts that support my case would be more like it.

It is possible that the health care legislation may have some budgetary benefits. Medicare’s chief actuary projects that it might do so, but in much more modest ways that Secretary Geithner or Professor Krugman are suggesting.

Further, the alternate view of the chief actuary should have been discussed by Geithner in my view. Failing to do so is false information just as it would be if a CEO of a company made a wondrous financial projection even though he had just signed the auditor’s report that raised serious doubts about that optimistic projection.

About Fundmastery Blog

Kurt Brouwer is a fee-only financial advisor with three decades of experience. He is the chairman and co-founder of Brouwer & Janachowski, LLC. Kurt has written books, articles and hundreds of blog posts on mutual funds, ETFs and other investment topics. E-mail: kurt.brouwer *at* gmail.com.